Eclipse

"This is by another good friend of mine, Arvind Subramanian. He’s a senior fellow at the Peterson Institute where I work part-time in DC. I remember saying to him at one point, “Arvind, you should be careful about predicting that China is going to overtake the US, because lots of times when people predict that kind of thing it doesn’t come true.” He replied: “Don’t worry, Simon. I’m actually saying they’ve already overtaken us.” Arvind is a very historically minded person. He has dug up a lot of relevant data, and has some wonderful stories that illustrate his points. The most vivid, and my favourite, is about the Suez Crisis in the 1950s. At that moment, the British thought they were still top dog in the world. They invaded the Suez Canal with the French and Israelis, and the Americans were not happy. The British were having problems with the pound and their balance of payments, and Eisenhower would not agree to the IMF lending to them until they withdrew from Suez. This was an extraordinary reversal, an extraordinary fall of the position of the British pound in the world economy. Arvind’s point is that this could absolutely happen to the US. There’s no law of economics or physics that says the US dollar is the world’s reserve currency indefinitely, irrespective of what America does. No, he’s fairly agnostic on that. He has an institutionalist view of history, so you have to take some points off China on that score. He’s just arguing that it’s a very large economy, it’s going to be an increasingly important part of the world and it trades a lot. These things will naturally bring it the status of safe-haven asset or currency, and that will tend to displace the dollar. “There’s no law of economics or physics that says the US dollar is the world’s reserve currency indefinitely, irrespective of what America does” It’s more about the long-term impetus of economic growth, though I’m sure he will tell you there will be ups and downs along the way. But there will be a rebalancing of the world, so the share of income is more like it was in 1700, when the West was nowhere near as important as it is today. China and India will be more important, and, of the two, China is a bigger, more open trading nation, so its currency is more likely to contest or replace the US as the predominant reserve currency. Yes. I actually disagree with Arvind in that I think China is going to have a lot of problems – it won’t overtake us exactly in this fashion. But ideas matter, and it’s a well-argued, nicely balanced wake-up call. It’s also selling a ton of copies in China. Anyone in Washington who is paying attention and trying to think strategically must read this book. They have to think about what happened to the British and why. “Anyone in Washington who is paying attention and trying to think strategically must read this book” My argument would be that if we don’t put our fiscal house in order, the US dollar will lose its role in the world. US treasuries will no longer be the ultimate safe haven, our interest rates will go up, and we’ll absolutely have a decline of the kind Arvind talks about. Arvind’s thesis is more that China will take over, there’s not much we can do about it, while I think the future of America is much more in American hands. That’s the message: Don’t panic, we can fix it. The good news is that when I talk to audiences around the US, people on the right and the left get really intelligently engaged with the issues and the numbers. We have a fantastic discussion, admittedly up to the point where I say that their taxes will likely have to increase. Then they get upset and I have to sneak out the back. But this is progress. The war of 1812 is a good example for me. It relates to the theme we’re discussing, of using history to try to say something about policy today. In the war of 1812 the Americans were trying to get their government to deliver in terms of defence, but they weren’t willing to pay for it. You get what you pay for and you pay for what you get: Washington was burned. The US did not default on its debt, but there was still a fiscal disaster of the first order. That’s something we should seek to avoid at all costs. I don’t think that discredits the people who raised the alarm. On the contrary, those warnings were pretty timely. Exactly. Politicians swung back to being more careful. Unfortunately that was just on the surface. Beneath the surface the right wing of the Republican Party was moving further away from caring about debt as a fiscal responsibility and much more towards cutting taxes and reducing the scale of government. That political shift – which has been going on since the late 1970s – was masked by the fact that the 1990s had relatively good fiscal outcomes. It’s that movement of the Republican right that gave you the Bush tax cuts, the idea that deficits didn’t matter in the 2000s, and a lot of the political deadlock today."